Study: ‘Fiscal cliff’ could hit jobs hard

Failure by Congress to avoid the “fiscal cliff” could put hundreds of thousands of people across the nation out of work, most of whom don’t work for the government and don’t live in federal government strongholds.

A study this year by George Mason University’s Center of Regional Analysis estimated that the U.S. could lose 2.1 million jobs by spending cuts alone, without considering the effects of tax increases that could kick in next year and cut income for workers and business owners.

Fewer than 300,000 of those lost jobs would come from direct federal employee cuts, according to the center. Many more would come from government contractors and state-level positions. The vast majority, however, would come from other private-sector jobs.

Center director Stephen Fuller said the biggest impact would come to the retail and construction sectors and would happen gradually as higher taxes would bite into income for consumers and business owners, causing them to spend less freely.

“None of this happens all at once,” Mr. Fuller said. “You have the initial [federal] cuts, then it works its way through the economy and there’s a psychological effect that takes place.”

While many federal jobs are concentrated in the D.C. area, the federal government has a large contingent of workers in every state. According to data from the U.S. Census, nearly 2 million permanent civilian employees were spread among the 50 states in 2009, the most-recent year for which data were available. The number of employees in each state varies, from about 3,000 in Delaware to 169,000 in California. The other states with the most federal employees are Texas, Maryland and Virginia, as well as the District — all of which have large communities of private-sector contract employees that support the government workforce and facilities.

The George Mason study predicted Virginia would lose 207,000 total jobs in the public and private sectors, while the District would lose 127,000 and Maryland would lose nearly 115,000 — ranking second, fourth and fifth respectively in potential job losses.

California and Texas, each with a strong military presence, ranked first and third at 225,000 and 160,000 possible job losses.

With nearly a half-million jobs on the line in Virginia, Maryland and the District, dropping off the fiscal cliff would deliver a direct blow to federal employees and private contractors around the nation’s capital who depend on the government for business.

But the prospect of higher taxes and federal funding cuts — half of which would be applied to defense programs — has some observers predicting much greater indirect job losses for everyday businesses that may have to lay off workers or close down as the result of another economic downturn.

“Taxes go up and people have less to spend, and that hurts the state economy,” said Warren Deschenaux, director of the Maryland Department of Legislative Services’ Office of Policy Analysis. “There’s not a huge impact directly on what the state spends, but the major effect is that we might be going into a recession if all of these things hit at once.”

Officials in California are wary of such a scenario and have warned that job losses could cause the state to lose as much as $22.7 billion in gross state product.

In addition to the 225,000 possible job losses, another 400,000 Californians could lose their current unemployment benefits at year’s end, as the extension on such benefits would expire.

Robert Kleinhenz, chief economist for the private nonprofit Los Angeles County Economic Development Corp., told The Associated Press recently that job losses combined with declining income due to tax hikes would be enough to reverse the ongoing recovery from the last recession.

“This is a timing problem,” he said. “If the Congress can work out the timing, maybe space out some of these adjustments over the next couple of years, then we would not endanger this recovery.”

Some of the biggest job losses could occur in federal contracting, where private businesses depend on purchases from the government.

This month, defense industry officials sent a letter to Washington signed by more than 130 industry CEOs, urging Congress and the president to work out a deal. They warned that companies are already being affected.

The fiscal cliff “has created uncertainty in the marketplace over the past year and has had a real impact on jobs, investment and innovation,” wrote Aerospace Industries Association Chairman and President David P. Hess. “Uncertainty is forcing companies to defer investments and hiring today, when we need it most.”

The pain isn’t going to be limited to the federal government and private sector. State governments are also bracing for potential reductions in federal funding that could force them to cut programs and lay off employees.

According to Federal Funds Information for States, states could lose $7.5 billion in federal funds for 161 grant programs, with the brunt of those cuts hitting schools.

The Virginia Education Association, the state’s teachers union, said federal cuts could deprive the state of $75 million in education funds and put 1,300 school employees out of work.

In Minnesota, state economist Tom Stinson said last week that the state could lose 115,000 jobs over the next two years, and that personal income could drop by 4 percent.

“The fiscal cliff is ultimate gloom,” he said.

This month, governors from Delaware, Minnesota, Arkansas, Utah, Wisconsin and Oklahoma met with President Obama and congressional leaders in Washington to talk about what may happen to them if the nation goes over the fiscal cliff. All of the governors urged the leaders to come to a compromise and said their states’ futures are resting on the outcome.

“It’s almost like we have to prepare one budget if they solve it and one budget if they don’t solve it,” Utah Gov. Gary Herbert, a Republican, told the Los Angeles Times. “And so states really understand the seriousness of this issue and the impact it’s going to have on our own budgets and our own economy.”

But the real impact the fiscal cliff has on jobs could have nothing to do with new policies. The uncertainty hanging over the nation has cast a pall over the economy throughout the year.

Massachusetts Gov. Deval Patrick, told the AP recently that his state is already suffering because businesses are too worried about the economy to spend money on creating new jobs or expanding their infrastructure.

Mr. Patrick, a Democrat, called last week for state spending cuts to close a $540 million budget shortfall, which he said was partly created by businesses’ reluctance to spend money.

“By all accounts, that uncertainly and the resulting slowdown in economic growth is the direct cause of our budget challenges,” he said.